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Looking Beyond Variance: The power of Expected Shortfall in crisis-resilient portfolios

Klinkert, Beata LU (2025) NEKP01 20251
Department of Economics
Abstract (Swedish)
The 21st century has been marked by repeated financial crises that have challenged the effectiveness of traditional portfolio management strategies. Events such as the 2008 financial crisis, the Eurozone debt crisis, and the COVID-19 pandemic have exposed the vulnerabilities of conventional models, such as the widely used Markowitz (1952) mean-variance framework. Since this model balances risk and return symmetrically, it fails to reflect investors’ heightened sensitivity to downside risk during periods of market stress. In response to these shortcomings, this study investigates portfolio optimization methods that focus specifically on downside risk, with a particular emphasis on Expected Shortfall (ES), also known as Conditional... (More)
The 21st century has been marked by repeated financial crises that have challenged the effectiveness of traditional portfolio management strategies. Events such as the 2008 financial crisis, the Eurozone debt crisis, and the COVID-19 pandemic have exposed the vulnerabilities of conventional models, such as the widely used Markowitz (1952) mean-variance framework. Since this model balances risk and return symmetrically, it fails to reflect investors’ heightened sensitivity to downside risk during periods of market stress. In response to these shortcomings, this study investigates portfolio optimization methods that focus specifically on downside risk, with a particular emphasis on Expected Shortfall (ES), also known as Conditional Value-at-Risk. Building on the methodology of Rockafellar and Uryasev (2000), this study constructs ES-minimized portfolios and compares them to mean-variance and 60/40 portfolios. Unlike much of the existing literature, this study incorporates a diverse set of Swedish and international assets, while accounting for a Swedish investor's home bias. The analysis spans over two decades and evaluates portfolio performance during major economic crises. The findings indicate that ES-based portfolios tend to be more concentrated than their mean-variance counterparts and are more effective at mitigating tail risk and. The study also reveals the growing limitations of the 60/40 strategy in an evolving financial landscape, emphasizing the relevance of downside-focused optimization in contemporary portfolio management. (Less)
Please use this url to cite or link to this publication:
author
Klinkert, Beata LU
supervisor
organization
course
NEKP01 20251
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Conditional Value-at-Risk, downside risk, economic crisis, expected shortfall optimization, mean-variance
language
English
id
9207071
date added to LUP
2025-09-12 11:11:55
date last changed
2025-09-12 11:11:55
@misc{9207071,
  abstract     = {{The 21st century has been marked by repeated financial crises that have challenged the effectiveness of traditional portfolio management strategies. Events such as the 2008 financial crisis, the Eurozone debt crisis, and the COVID-19 pandemic have exposed the vulnerabilities of conventional models, such as the widely used Markowitz (1952) mean-variance framework. Since this model balances risk and return symmetrically, it fails to reflect investors’ heightened sensitivity to downside risk during periods of market stress. In response to these shortcomings, this study investigates portfolio optimization methods that focus specifically on downside risk, with a particular emphasis on Expected Shortfall (ES), also known as Conditional Value-at-Risk. Building on the methodology of Rockafellar and Uryasev (2000), this study constructs ES-minimized portfolios and compares them to mean-variance and 60/40 portfolios. Unlike much of the existing literature, this study incorporates a diverse set of Swedish and international assets, while accounting for a Swedish investor's home bias. The analysis spans over two decades and evaluates portfolio performance during major economic crises. The findings indicate that ES-based portfolios tend to be more concentrated than their mean-variance counterparts and are more effective at mitigating tail risk and. The study also reveals the growing limitations of the 60/40 strategy in an evolving financial landscape, emphasizing the relevance of downside-focused optimization in contemporary portfolio management.}},
  author       = {{Klinkert, Beata}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Looking Beyond Variance: The power of Expected Shortfall in crisis-resilient portfolios}},
  year         = {{2025}},
}